All posts tagged single currency

David Cameron’s speech on the U.K.’s future in the European Union could be big news for sterling.

In fact, it could prove to be a defining moment that justifies the pound’s safe-haven status and makes it an even more attractive alternative to the euro.

At the moment, the fortunes of the pound look distinctly poor.

The sterling index has been falling steadily since the start of the year and, as Capital Economics chief U.K. economist Vicky Redwood suggested in recent research, there are seven good reasons to keep selling the currency.

Slow economic growth, more quantitative easing, a deteriorating current-account position, easing of the euro-zone debt crisis, the possible loss of the U.K.’s triple-A rating and a loss of fiscal discipline all feature on the list.

This is becoming a habit. For the second time in two weeks Wednesday, the Bank of England complained about the strength of the pound.

Echoing comments made by Governor Mervyn King in the quarterly Inflation Report last week, the U.K.’s central bank said in its monthly meeting minutes Wednesday that the strength of sterling against the euro dents the country’s chance of forging an export-led economic recovery.

A strong currency makes a country’s exports look more expensive abroad. It is rarely welcomed, and now that the U.K. has lost its prop from the banking sector, exports are all the more important. So the BOE has a point.

Ryanair’s outspoken chief executive Michael O’Leary was on typically outspoken form when he flew to Brussels–well,

Associated Press

Ryanair Chief Executive Officer Michael O’Leary.

Charleroi–to visit the commission and tell them about innovation.

After saying that researches in laboratories should “get a job” (at an EU-funded innovation jamboree) he pressed some more painful buttons by saying a Greek exit from the euro would provide a tourism boom for the region and a better solution than the current bailout programme.

He added that the bailout of Greece is “throwing money down a black hole” until the country complies with the conditions applied to its rescue.

He also slammed the running of Greek flag carrier Olympic, which is less of an airline and “more of an employment subsidy structure,” before sharing out the national stereotyping fairly by saying that Ryanair doesn’t have a formal plan for the collapse of the single currency because “we’re Irish, so we don’t have a formal plan for anything.”

It could be, as some fear, that the central banks have rolled out a safety net in case European Union leaders fail to resolve the single currency’s crisis of confidence at next week’s summit.

But investors seemed to read it as meaning central banks will do whatever is necessary to prevent another financial disaster.

And, indeed, there’s talk that the widely touted blunderbuss, aimed at finally resolving the crisis of confidence plaguing the euro-zone sovereign debt market, will be fired by the EU, the IMF and the European Central Bank.

The ECB is the most important of these parties, with, if it chooses, an infinitely expandable balance sheet available to shore up crippled bond markets across the single currency’s periphery, not least Italy’s.

The euro’s levitation act against the dollar has been one of the more puzzling aspects of the European debt crisis.

Currently around $1.36, the single currency is admittedly some way below its high point for the year. That was $1.4940, hit on May 4. However, it’s also substantially above its low, the $1.2860 level plumbed back on Jan. 10. And that’s surprising given the continuous, front-page prominence of the euro zone’s many problems, even if, as seems likely, the U.S.’ own struggle with debt is returning to the forefront too.

Some commentators have suggested that the euro’s resilience is down to repatriation by the continent’s banks, bringing offshore funds home to shore up their capital buffers. Others think the safe-haven status of the German bund is a more likely explanation. As yet there is still no ‘German euro,’ so any bund-buying spurred by fresh waves of risk aversion perversely supports the single currency.

However, as analysts at Commerzbank put it this morning:

“Even if one believes that bunds will be able to maintain this special status it is still correct that there is a risk the euro might collapse-–as reflected in the extreme euro-short positions of the speculative market and the record levels of EUR/USD risk reversals.”

The bank thinks that this uneasy status quo is likely to endure until the markets get their final showdown; between those who want the European Central Bank to act as lender of last resort to struggling sovereign states, and those who don’t.

The Swiss National Bank seems content to let the currency market push the Swiss franc lower, and is likely to wait for key economic data due in December before it considers lifting the CHF1.20-per-euro floor, according to analysts.

The franc weakened below 1.2400 versus the euro and traded at a four-month low against the dollar this week without any apparent action from the Swiss central bank, and this despite the ongoing euro-zone debt tensions, and widening European yield spreads against benchmark German bunds.

“There’s still talk in the market that the SNB will raise its floor for EUR/CHF to 1.25 or higher, but there’s been no sign of any direct activity from the central bank,” said Roland Raczek, a currency trader at BayernLB.

This talk has been enough to discourage investors from piling into the franc, especially at a time when bearish economic data and the ongoing debt crisis have weighed heavily on the euro.

SNB policy makers insist they are ready to take action, but only if risks to the economy or prices begin to emerge.

Given that an at-least-partial breakup of the world’s second reserve currency is now a matter of open discussion, it’s perhaps surprising that gold has not yet managed a new assault on the record high scaled in September.

Back then the metal hit $1920.60 an ounce; now it’s below $1800. Gold usually benefits when investors are feeling risk averse, as they certainly have been in recent weeks as the euro’s agony ground on.

So why this reticence to advance?

Analysts at FXPro think it may be because the implications for gold from a partial break-up of the euro zone aren’t as clear cut as might be thought. Assuming a new union of the stronger euro-using states, and the expulsion of weaker ones, then the ‘new euro’ would be likely to appreciate, possibly quite sharply. This in turn would lead to a reduction of inflationary pressures within this new euro zone, reducing gold’s allure as a hedge against rising prices.

Moreover, they add, global real interest rates are near zero and would need to push on into negative territory to maintain their recent supportive correlation with gold.

German Chancellor Angela Merkel and French President Nicolas Sarkozy have, reportedly, discussed creating a “core” euro zone of closely integrated countries, leaving the rest to tag along as best they can. But European Commission President Jose Manuel Barroso seems to think that not only can you not have two speeds within the single currency, you can’t have two speeds within the European Union. Every country, he thinks, has to become a fully paid-up member of the euro zone.

For most of its history, the EU and the single currency have been political projects imposed in a top-down fashion by Europe’s political elite. Mr. Barroso personifies that perspective.

But the problem for Europe’s national politicians now is that their voting publics are no longer willing to be force fed the project. That’s because the easy benefits are no longer there. From the mid-1990s to the financial crisis in 2008, Europe was a win-win proposition for most Europeans. For those in the periphery it meant cheap credit and booming economies.

For those at the center its benefits were more modest, but generally entailed reasonable growth, low inflation and not having to bother with changing money on holiday.

Now that convergence onto sunlit economic fantasy land has ended for Europeans at the periphery while those at the center are having to mull the size of the bill for the good times, there’s less enthusiasm for Europe.

Greece’s debt crisis has certainly inflicted some damage on the single currency. But, this is nothing to what will happen if Italy’s debt position deteriorates too.

The difference is not only the scale of the problem–with Italy’s external debt of nearly $2.5 trillion amounting to about five times the size of Greece’s $500 billion–but the fact that European leaders still have no idea how they would save Italy from default.

At the moment, Greece’s problems are largely political as the country tries to cobble together a coalition government that will implement austerity measures and convince the international investment community that Greece is prepared to take its medicine.

The country may have come close over the last week or two to leaving the euro. But, with polls showing that 70% of Greeks still want to remain part of the single currency it looks as if Athens may be able to pull off a political sleight of hand and get its bailout after all.

There’s never been a higher-stakes poker game than the one being played by Greek Prime Minister George Papandreou.

Having agreed at last week’s emergency European summit to deep austerity and what boils down to a loss of fiscal sovereignty to Eurocrats, in exchange for keeping the rescue funds flowing, Mr. Papandreou decided, without warning, to put the agreement to the Greek people.

Ultimately, however it is phrased, the question will boil down to whether Greeks want to be in the euro zone or out. Suddenly, from feeling like they were being crushed by the Europeans, the Greeks have turned the tables. The Greeks are talking about holding the referendum before the next infusion of IMF/EU cash is due to come in December.

It seems unlikely, however, that a country unused to referendums and in the throes of austerity-driven strikes and social confusion, not to mention a tradition of bureaucratic inefficiency, will be able to act so quickly. Some time well into the first quarter of next year is more likely. The IMF/EU will find it difficult not to make the December payment.

Greece’s rescuers will not want to be seen to interfere with such an important democratic process, even if they disagree with a referendum being held in the first place.

More crucially, by raising the prospects of a referendum, Mr. Papandreou does two things. He puts the onus of agreeing the big austerity cuts necessary for Greece to stay in the euro zone on Greek voters. And he gives himself scope to renegotiate some of the onerous conditions imposed on Greece by its European partners, showing them the chaos and contagion that would be triggered by a unilateral “hard” default by Greece on its sovereign debt.